(Japan) Reform at JR companies

This editorial from the major English language newspaper in Japan looks at how the money making privatized profitable railroads on the main island of Honshu have to strike a delicate balance between profitability and providing a public service:

Reform at JR companies
07/05/2005

West Japan Railway Co.'s adviser, Masataka Ide, the chief architect of the privatization and reform of Japanese National Railways, has resigned from JR West's board. Ide, the former JR West president who has made the company what it is today, has taken the blame for the train disaster in April that killed more than 100 people. The accident should lead to a serious review of the legacies left behind by the breakup of the state-run railway services into private JR companies.

Before privatization, the railway company was seen as hopeless. It was faltering under a crippling debt burden, morale among employees had hit rock bottom, and it kept losing money despite a series of fare hikes. The firm was in such dire financial shape that people expected only the Yamanote Line in Tokyo and Shinkansen bullet trains to survive.

Ide and other reformists set out to privatize the mammoth state-run business for independent, efficiency-oriented management as the only way to secure its survival.

Taxpayers supported the reform proposals as a way to preserve a nationwide railway network and agreed to shoulder 14 trillion yen of the company's debt under the privatization plan. They were concerned, however, over whether the privatized JR companies would be able to be consistent with the public nature of their services.

It turned out the three JR companies operating in Honshu have been paying back their debts while paying taxes and improving their services without raising fares, except for hikes related to a consumption tax increase.

Moreover, the number of accidents has fallen sharply, partly because the companies have regained enough financial strength to invest in safety measures and other facilities. In addition, executives and employees have made devoted efforts to make the privatization successful.

JR West may have gotten carried away by its success story. About a month before the fatal accident, JR West announced an ambitious medium-term business plan designed to stop the decline in income from fares and increase profits in such non-core businesses as retailing and condominium construction.

Apart from the three JR companies operating in Hokkaido, Kyushu and Shikoku, which are kept alive by special funds created at the time of privatization, JR West has been on the weakest financial footing among the three JR companies in Honshu. The Osaka-based railway operator has been hamstrung by a weak local economy and a large number of money-losing local lines.

In a desperate struggle to catch up with more profitable East Japan Railway Co. and Central Japan Railway Co., JR West has been too obsessed with profitability. That has led to a delay in the renewals of old vehicles and outdated automatic train stop systems.

The company has also been bedeviled by the negative legacies from the national operation era. Since it stopped recruiting new graduates for some time, the company has an extremely small number of employees in their 30s. Many long-timers have left the firm through early-retirement programs. The distorted age structure of the work force has hampered efforts to hand down skills and expertise to younger generations.

In a labor-intensive business like railway services, it is vital that management is well aware of what front-line workers are thinking in terms of safety. Monitoring by labor unions should be considered as important as reports by executives. But the lack of a healthy labor-management relationship might be an unfortunate legacy from the era of state ownership.

Privatization was intended as a step to outgrow such negative legacies. But the disastrous accident has underscored the fact that JR companies face common management challenges. The shrinking population is beginning to have an impact on all JR companies. JR West's plight offers an objective lesson.

Seeking higher profitability in supplying services of such a highly public nature requires a delicate balancing act. All JR companies must realize they must never stop reform efforts.